Deutsche Bank - USD/JPY has room to go higher

Deutsche Bank - "The yen has more than reversed its gains made during the US election week. The trigger has been the dissolution of Japan’s Lower House this week, which paves the way for elections on16 December. The LDP are very likely to win. The LDP leader, Shinzo Abe, has been vocal about the need for reflationary policies. In a speech given on 15 November, he outlined the need for an inflation target of 2% or 3% and unlimited quantitative easing to raise inflation expectations. Should such a policy be implemented it could result in meaningful yen weakness. Indeed, using the monetary as a share of domestic nonfinancial liabilities as a measure of how expansive monetary policy is, we find that the US has been noticeably more expansive since the 2008 crisis. A trend turn in this would mark a change in relative policy trends and would weigh on the yen. With the yen weakening and the Nikkei rallying, markets have started to price the prospect of reflationary policies. USD/JPY has accordingly deviated from the 2y rate differential. In recent years, there have been instances of up to 5% deviations from the rate differential before they come back into line (see second chart). This suggests that a move to 82 or 83 is possible without a supporting rates move. This matches our year-end target of 82. However for a larger move in USD/JPY we would need to see the LDP deliver on its promise of reflationary policy (or US yields to go up). History suggests caution is warranted here. Another dynamic to monitor will be how the BoJ responds to an Abe government. For now, we stay bearish yen."